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Typically, offshore funds are not subject to regulation under the U.S. securities regulations as long as they are not sold to U.S. citizens or residents. Offshore funds were not liable for fraud under §10(b) of the Securities Exchange Act unless they met the standards for the “conduct or effects” test. The test focused on:

  • Whether the wrongful conduct occurred in the United States; and
  • Whether the wrongful conduct had a substantial effect in the United States or upon United States citizens.

The “conduct or effects” test was rejected in Morrison v. Nat’l Austl. Bank Ltd. in 2010. The court established a new transactional test that stated that §10(b) and Rule 10b-5 do not apply extraterritorially, but only apply to “transactions in securities listed on domestic exchanges and domestic transactions in other securities.” The court stated that domestic transactions should focus on the purchase and sale of securities. The case did not specifically define the term “domestic transactions,” however, because the parties to the case were foreign and the dispute occurred outside the United States.
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House Financial Services Committee Chairman Spencer Bachus (R-AL) has reintroduced his bill calling for a self-regulatory organization (SRO) for investment advisers. The bill has a Democratic co-sponsor, Rep. Carolyn McCarthy (D-NY), indicating that it may have some bipartisan support. Rep. Bachus said that the bill was drafted in response to a Securities and Exchange Commission (SEC) study which showed that the SEC does not have sufficient resources to adequately monitor and regulate the 12,000 registered investment advisers. The SEC examined only 8% of advisers in 2011, which is significantly less than the 58% of broker-dealers that were examined.

The bill calls for the creation of one or more SROs which would be called a “National Investment Adviser Association” (NIAA). NIAA would report to the SEC, and investment advisers with retail customers would be required to become members. The bill provides an exception from the membership requirement for investment advisers with less than $100 million in assets under management. The bill gives individual states the authority to regulate those investment advisers as long as the states conduct periodic on-site examinations.
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On April 11, 2012, the Securities and Exchange Commission (SEC) announced it will accept comments prior to creating rules required by the Jumpstart Our Business Startups (JOBS) Act. The SEC believes it is important to hear the public’s opinion before releasing proposed rules. It previously requested comments before rulemaking when the Dodd Frank Wall Street Reform and Consumer Protection Act was passed.

The SEC will disclose all information pertaining to the JOBS Act on its website. This will include all meetings with interested parties. The meeting participants must provide an agenda of intended topics in advance, which will be released to the public. The participants will also be encouraged to submit written comments to the public file in order for other interested parties to review the information.
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Two states have created a time-table to help mid-sized firms make the switch from Securities and Exchange Commission (SEC) supervision to state regulated supervision. As a result of the Dodd-Frank Wall Street Reform and Consumer Protection (Dodd-Frank) Act, those investment advisers with $100 million or less but more than $25 million in assets under management will be required to register with the state or states in which they do business instead of the SEC. We have already discussed the switch in Mid-Sized Advisers Should Have Already Commenced Transition. Both Iowa and Missouri are helping mid-sized firms in their state by creating time-tables and providing guidance for the transition.
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According to American Century Investments’ third annual Financial Professionals Social Media Adoption Study, more advisers are starting to use various forms of social media for professional uses. The results were drawn from an online survey of 300 financial professionals who are employed as financial advisers, brokers or registered investment advisers. The participants were members of Research Now, and they averaged fourteen years in the financial industry.

The study showed an increase in the use of smartphones and other mobile devices to access social media websites than in previous years. Approximately 35% of advisers claimed to use smartphones for social media access, which is up from the 27% in 2011. Also, there was an increase in advisers who used mobile devices such as iPads and other tablets for access from 11% last year to 22% in 2012. The majority of financial advisers; however, still access social media through laptop and desktop computers.
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As a result of the Dodd Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), mid-sized firms of less than $100 million in assets under management should make the switch from Securities and Exchange Commission (SEC) oversight to state regulatory oversight. Most advisers know that under the newly adopted SEC rules, mid-sized advisers that were SEC registered prior to Dodd-Frank must remain SEC registered through the first quarter of 2012, and then complete their switch to state regulation by June 28, 2012. Firms wishing to switch should have already completed the state registration process to become effective in the state or states in which the adviser is registering.

It was estimated by this time that 3,200 firms would have made the switch to state regulation. However, spokesman John Nester for the SEC announced that as of April 5, a little more than 1,900 firms claimed that they were no longer eligible for SEC registration and needed to make the switch.
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The Florida Legislature has recently passed a law which imposes harsher penalties for those who sell unregistered securities. The bill, HB 777, was signed into law by Governor Rick Scott on April 6, 2012. The bill will take effect July 1, 2012. As a result, the lowest permissible sentence for violations is increased.

The bill provides that all those who do not register securities offerings with the state’s Office of Financial Regulation may be charged with a third-degree felony at a higher level than previously allowed. A third-degree felony in the state of Florida carries up to a five year prison sentence. Broker-dealers, appointed persons, and issuers of securities who do not register with the Office of Financial Regulation are also subject to the same penalty.
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In a previous blog, Georgia Securities Commissioner Proposes Rule Amendments, we discussed the proposed amendments to rules previously promulgated under the Georgia Uniform Securities Act of 2008. The amendments were recently adopted and became effective on March 29, 2012.

Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds and issuers of securities, among others. Our regulatory practice group assists financial service providers with the complex issues that arise in the course of their businesses, including compliance with federal and state laws and rules.

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One of the most significant provisions of the Jumpstart Our Business Startups (JOBS) Act is its elimination of the general solicitation ban currently contained in Rule 502 for Rule 506 offerings sold only to “accredited investors.” As a result, hedge funds will be able to advertise to investors through the internet, mass mailings, and other media. Previously hedge funds have been banned from soliciting or advertising their private offerings to the general public. This prohibition has created confusion among hedge fund managers because of uncertainty about the meaning of “general solicitation.”

The JOBS Act requires the Securities and Exchange Commission (SEC) to eliminate the ban on general solicitation and advertising as long as all purchasers are either “accredited investors” or “qualified institutional investors.” An “accredited investor” includes an individual whose net worth is at least $1 million, excluding the value of his/her primary residence or who meets certain income criteria. We have previously discussed the definition of “accredited investor” in Financial Advisers Should Note More Restrictive Accredited Investor Definition. A “qualified institutional investor” includes companies that manage a minimum at $100 million in assets. Under the JOBS Act, the SEC must adopt rules to eliminate the ban on advertising for an offering by a private issuer within 90 days.
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With the passage of the Jumpstart Our Business Startups Act (JOBS Act), the Securities and Exchange Commission (SEC) will be required to create a number of new rules, in addition to the rules already required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).

The first deadline that the SEC faces under the JOBS Act is adopting rules eliminating the ban on general solicitation of certain private offerings. It will have 90 days to revise Rule 506 of Regulation D to allow those securities to be sold using general solicitation or advertising when all of the purchasers of the securities are “accredited investors.”

The JOBS Act also created a new crowdfunding exemption to registration. The SEC will have 270 days to adopt the rules and regulations effectuating this exemption, as the SEC determines to be necessary or appropriate for the protection of investors. The Financial Industry Regulatory Authority may also adopt rules regulating “funding portals” for issuers.
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